A few years back, before this crisis erupted, several economists were concerned about the sustainability of the large global imbalances fueled by the so-called Bretton Woods II system. These economists recognized, in the tendency of export-led economies to manage their exchange-rate systems, the origin of large trade and current account surpluses that, via large foreign reserve accumulation, were financing the mirror image of those surpluses, namely the large U.S. trade and current account deficits.
These surpluses, primarily in several export-led Asian economies and also in oil-producing countries, ballooned to extensive proportions in 2007 and 2008. The purchases of U.S. government bonds by these investors helped keep long-term interest rates low and led many investors to seek high-yielding investments, especially in some emerging markets.
Although we are not (yet) witnessing a U.S. dollar crisis, the Bretton Woods II system is still at the center of the debates on the origins of this crisis. Understanding the nature of this crisis is fundamental in order to understand what reforms need to be undertaken for this not to happen again--and to understand what the global economy will look like after this crisis.
Although other factors have played a part, it is hard to argue that the large global imbalances that arose a few years ago had no role whatsoever in the current, synchronized global recession. However, so far, global imbalances do not seem to be on even the long-term agenda of most of those trying to remake the global financial system.
Global imbalances are now starting to narrow, though, and the current crisis is likely playing a role. As saving rates rise in the U.S., trade volumes fall on lower demand, expensive credit and weak commodity prices. The current U.S. account deficit has fallen from 6.6% at the end of 2005 to 3.7% at the end of 2008, and the IMF estimates it will fall further, to 2.8% of GDP, in 2009.
Many of the emerging economies that easily financed wide deficits are now being forced into consuming less, given the lack of credit and, in some cases, currency devaluation that boosts the costs of imports. Meanwhile, the fall in the price of oil and other commodities is shifting many oil exporters--some of the larger surplus nations--into deficit territory.
Is this the death of Bretton Woods II? Can export-led growth countries increase consumption, or are we going to see large imbalances in the global economy return when the recovery will be in full swing? And would a permanent correction of global imbalances be contractionary? If surplus economies continue along a business-as-usual path, trying to stoke export demand rather than increasing domestic spending to boost consumption, it could increase deflationary pressures.
Fiscal and current account surpluses and foreign exchange reserves can be used to increase government spending on infrastructure and public services and boost consumption and investment, which might help unwind the global imbalances. In fact, fiscal stimulus spending underway during the current downturn by surplus countries like China and the Middle East will help increase their own domestic demand and also boost the exports of deficit countries.
Governments with comfortable fiscal/external surpluses, commodity revenues or foreign exchange reserves, such Asia-Pacific, the Gulf Cooperation Council, Canada, Norway, Germany and Russia, have rightly increased stimulus spending in spite of easing exports and commodity prices recently. However, there are criticisms that such spending still falls short and is steered toward export firms rather than domestic demand, which will only exacerbate global deflationary pressures. On the other hand, stimulus spending by deficit countries such as the U.S. and U.K. will only accentuate pressure on global fiscal deficits and imbalances.
Some are still concerned that the unwinding of imbalances might be disorderly, leading to swift exchange-rate moves. However, it is also possible that this might be a gradual process, aided by a beefed-up IMF and other multilateral institutions which will avert balance of payments crises--if not sharp contractions--in many emerging economies, especially in Eastern Europe.
Some imbalances seem to be persistent though. China's surplus does not seem to be shrinking very much, largely because the import contraction, including goods for re-export and cheaper commodities, is more severe than that of exports. And those of Germany and Japan are expected to continue to be quite large also.
The consumption share of China's GDP has fallen since the year 2000, although Chinese government investment could provide a boost in 2009. The IMF suggests China's current account surplus will continue to rise, albeit at a slower pace, in 2009, nearing $500 billion from almost $430 billion in 2008. Such a large current account surplus implies still large reciprocal deficits in some of China's trading partners, likely the U.S. and several European countries.
There is a risk that China's fiscal stimulus might exacerbate production overcapacities, creating further deflationary pressures, unless China is able to stimulate domestic demand, especially private consumption. Moreover, there is related risk that China's extension of investment and credit expansion could defer China's transition to a global economy in which the U.S. consumer consumes less.
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Jean-Noel Kapferer and Vincent Bastien's ''The Luxury Strategy.''
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